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Introduction to ESG Case Study

Answer Key
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Answer Key
The answers below provide general key concepts that would be included in a correct
response. There is room for interpretation here, but the key and essential
components of a correct response are described below:

What do you think are the top material ESG risks facing
the three-company portfolio?
• Climate Change and/or Natural Resource Scarcity: All three companies
face physical risks from climate change, such as:
o CFC: Physical climate change risks to their distribution infrastructure
and natural resource product inputs, like water for beverages,
agriculture production, and baking.
o DDI: Their coastal location puts the asset at increased risk for physical
damage from flooding, hurricane winds, and intensified storms.
o PP: Physical climate change risks to distribution infrastructure presents
a direct risk to PP’s management of customer product distribution.

• Labor Management: All three companies face risks regarding their

management of the labor force, such as:
o CFC: With 65% of their drivers outsourced, this labor population
presents a risk to corporate reputation as any negative behaviors or
incidents will damage the brand and CFC’s customer retention.
o DDI: The labor force’s utilization of public transportation could present
a business continuity risk if this transportation system is disrupted due
to climate change impacts, transportation system labor strikes, or public
funding cuts that impact its reliability and accessibility.
o PP: With a 30% turnover rate, labor management is a risk to business
continuity and customer retention due to the impact each employee
has on fulfilling the correct order for the customer across multiple
supplier and product categories. Since PP does not mediate any
disputes between customers and third-party sellers, the labor force’s
retention and fulfillment accuracy can be a risk to PP’s corporate
reputation, customer and market opportunities, legal action, and lost
productivity.

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• Transparency & Reporting: Given the information presented on each

company’s current ESG-centric efforts, the lack of transparency and reporting
regarding each company’s approach to ESG governance, strategy, risks, and
opportunities, is a risk to corporate reputation, license to operate, valuation,
and each company’s ability to secure capital. CFC, DDI, and PP all face these
risks due to the limited transparency and reporting on ESG issues.

To reduce risk across the portfolio, what kinds of

engagement objectives would you recommend? In other
words, what expectations would you recommend your
management team communicates to these portfolio
company leaders to ensure ESG risks are managed?
The correct response to this question will be open to interpretation and articulated
in different ways, yet the key concepts that would be included in a suitable
response are described below:

• Climate Change Strategy: Whether direct physical risks or the indirect risks
to vital natural resource inputs for product development, all three companies
face significant climate change risks. An engagement objective regarding a
company’s climate change management strategy would support immediate
and long-term risk management.

• Employee Engagement & Welfare: All three companies rely on a large and
consistent labor force for their daily operations. Disruptions due to labor
strikes, labor availability, whistleblowing controversies, and the personnel
logistics associated with labor heavy businesses are all risks to business
continuity.

• Supply Chain Management: All three companies have significant

procurement needs and the wide range of suppliers to each company
presents a wide range of potential risks to manage. An engagement
objective regarding the company’s supply chain management, and
specifically the management of supplier environmental and social impacts,
would mitigate supply chain risks across the portfolio.

• Product Safety and Customer Welfare: All three companies either produce
products directly or procure a variety of materials to create value for the
customer (like DDI’s procurement of building suppliers). Greater
comprehensiveness and clarity on company actions to guarantee product

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safety and customer welfare would reduce the risks and direct costs involved
in product recalls, lawsuits, and loss of saleable merchandise, as well as the
indirect costs associated with customer losses, brand damage, regulatory
fines, and lost social license to operate.

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